WTO Panel Rules Against U.S.

Published 8:00 pm, Sunday, January 13, 2002

The World Trade Organization handed the United States a major loss Monday with a decision that opens the way for the European Union to ask for billions of dollars in punitive tariffs on U.S. imports.

Both the EU and the United States, however, immediately signaled their desire to avert a trade war that would dwarf any previous dispute and most likely hurt companies on both sides of the Atlantic.

The WTO appeals panel in Geneva ruled against a U.S. law granting multibillion-dollar tax breaks to Microsoft, Boeing and thousands of other American companies operating overseas.

The European Union, which brought the case, said it expected "rapid proposals" from Washington to bring itself into compliance with WTO rules.

The Brussels-based EU could ask the WTO for permission to start imposing up to $4 billion in sanctions almost immediately. The United States exported $165 billion in manufactured goods and farm products to the 15-nation EU in 2000.

But EU Trade Commissioner Pascal Lamy indicated he would wait until at least until the end of March, when a WTO arbitrator is to report on the exact value of U.S. goods the EU would be entitled to impose the punitive tariffs on.

Lamy also said the EU remained open to "meaningful discussions" with the Bush administration to resolve the case, whose origins date back three decades.

"We have made a point of handling this dispute in a very reasonable manner," Lamy said. "Now it's up to the United States to comply with the WTO's findings to settle this matter once and for all."

In Washington, the Bush administration said it would decide how to proceed after consulting with Congress and affected companies.

"We are disappointed with the outcome," said U.S. Trade Representative Robert Zoellick. "We knew that it would be an uphill struggle, but we believed it was important to make our case for a level playing field on tax rules."

Zoellick said the administration would continue "to seek to cooperate with the EU in order to manage and resolve this dispute" and would fulfill its obligations under WTO rules.

Trade lawyers said both sides want to avoid the prospect of punitive tariffs that would effectively double the price of billions of dollars worth of U.S. imports in Europe.

"No one wants to start a major trade conflict. I'm pretty sure that they'll do a deal," Keith Hendry, director of the trade law department of Clifford Chance Puender, said in Brussels.

The American law allows a company paying U.S. taxes to exclude income that is considered to be "extraterritorial" because it comes from goods or services primarily for sale or use outside the United States.

Washington says the law is designed to avoid taxing companies twice on income from foreign sources.

But the WTO panel ruled that the law was an export subsidy prohibited under WTO agreements because the U.S. government was forgoing income that it would otherwise be due, and because it relates only to goods being sent abroad.

It also said the income had no link to a foreign state and would therefore not be taxed anywhere else.

WTO panels have ruled against the law three times already.

When the WTO first ruled against the law, in 2000, Congress passed a replacement that tried to address EU objections, but Brussels said the new legislation made only cosmetic changes and the WTO agreed.